The Eighth Circuit Loosens the Grip of the Bankruptcy Gag Rule, but Holds Attorneys to Advertising Disclosure Requirement: Milavetz, Gallop & Milavetz, P.A. V. United States

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I. INTRODUCTION

The Court of Appeals for the Eighth Circuit, in a case of first impression, struck down a provision of the 2005 bankruptcy reform law that prohibits attorneys from advising their clients to incur more debt in contemplation of filing for bankruptcy. (2) At the same time, the court upheld a provision of the Bankruptcy Code that compels attorneys to include a specified disclosure within their bankruptcy-related advertisements. (3)

The court's rationale for striking down the Code's restriction on attorney advice was that its broad application restricted attorneys from rendering advice that in some situations would be entirely lawful and beneficial to their clients. (4) This decision protects an attorney's First Amendment right to free speech and rightfully allows consumer debtors the opportunity to be represented by counsel who may freely advise them of all their legal alternatives.

On the other hand, the court reasoned that the Code's advertising disclosure requirement does not constitutionally infringe on attorneys' rights. (5) Because it only mandates that attorneys include an additional two lines of factual information in their bankruptcy-related advertising materials, it does not overly burden attorneys' interests and may help prevent deception on the part of the consumer. Whether this requirement truly provides beneficial information to consumers, or alternatively lends confusion, is questionable, and attorneys bound by this ruling are likely to face ongoing frustrations.

II. FACTS AND HOLDING

In April of 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the BAPCPA), which amended and added multiple sections to the Bankruptcy Code (the Code), was signed into law. (6) The purpose of this Act was to "'improve bankruptcy law and practice by restoring personal responsibility and integrity in the bankruptcy system and ensure that the system is fair for both debtors and creditors.'" (7) A primary underlying goal of the Act was to curb perceived abusive or fraudulent uses of the bankruptcy system. (8)

One of the more striking BAPCPA amendments added the term "debt relief agency" to the Code, defined to include "any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer." (9) Further amendments either restricted the actions of, or required certain actions of, debt relief agencies. (10)

For example, debt relief agencies are barred from advising a client "to incur more debt in contemplation of ... [a bankruptcy] filing," as codified in section 526(a)(4). (11) Additionally, section 528 requires that all debt relief agencies must "clearly and conspicuously" include the following statement in their bankruptcy-related advertisements: "'We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code[,]' or a substantially similar statement." (12) It thus became necessary for attorneys, such as the plaintiffs in this case, to determine whether the provisions applicable to debt relief agencies affected them professionally. The issue revolved around whether the definition of a debt relief agency was interpreted to include attorneys.

In response to these concerns, suit was initiated by Milavetz, Gallop & Milavetz, P.A., a Minnesota law firm that practices bankruptcy law, as well as the firm's president, a bankruptcy attorney within the firm, and two clients who sought bankruptcy advice from the firm. (13) These plaintiffs collectively brought suit against the United States seeking a declaratory judgment that the "debt relief agency" provisions of the BAPCPA were not applicable to attorneys and law firms. (14) The plaintiffs first requested the court to declare that attorneys did not fall within the definition of "debt relief agency" as provided within the Bankruptcy Code. …